For Germany’s top financial regulator BaFin, the matter is clear: Virtual currencies like Bitcoin are not legal tender. Therefore, they don’t need to be centrally regulated.
In other words, use Bitcoins at your own risk in Germany. Sure, you can treat them as a method of exchange, just like farmers might have traded apples for oranges in the old days. Just don’t expect much legal recourse if things go wrong. For banks, regulators treat them like stocks – any bank that has a license to trade stocks can also trade virtual currencies if they wish. But like any individual who invests in the stock market, they shouldn’t complain if they suddenly find their investment is worth nothing.
This for a currency that has seen a meteoric rise in its value over the past year. On Friday, Bitcoin passed the $6,000 mark. On Saturday it hit a record high of $6,178 for just one Bitcoin, though it has fallen back slightly since. At the start of this year, it was trading at just $1,000 and back in 2015 at just $250. That dizzying surge has led to strong demand and forced other regulators around the world to take a much closer look at what is driving the currency’s rise – and whether it needs to be reined in.
Germany risks missing the boat, just like it did with the rise of Silicon Valley technology companies.
The jury on these digital currencies is still out. Goldman Sachs CEO Lloyd Blankfein has said he is open and is reportedly considering entering the Bitcoin trade. Jamie Dimon, head of rival JPMorgan, has called it “a fraud,” though he is investing in the so-called blockchain technology that drives digital currencies behind the scenes.
That same uncertainty goes for regulators, though many have started getting involved. Japan, where much of the currency and its trading orginated, in April became the first major country to make it legal tender and it has since become a method of payment in hundreds of stores around the country. New minimum standards for Bitcoin exchanges have been imposed by regulators since October to boost trust. That has allowed banks to start investing massively in financial-technology startups.
China, which has more investors in digital currencies than any other country, has gone in the other direction. Authorities in September declared public offerings in the currency, so-called ICO’s, illegal and soon after closed down existing trading platforms, though they didn’t ban holding Bitcoin outright and kept open the possibility of reopening trading platforms under strict oversight.
The United States has staked out a more cautious middle-ground. In the state of New York, the country’s financial center, any financial firm that trades in the currency must secure a license, though individuals and retailers that simply buy and sell the currency are exempt. State authorities can also impose capital requirements on companies using the currency. By contrast, national regulators have so far kept their distance, but are monitoring closely. The Securities and Exchange Commission has a department of 25 people keeping an eye on Bitcoin and blockchain developments – and another 90 people on call.
That brings us back to Germany, where virtually none of this is happening. Unlike the SEC, the financial regulator BaFin doesn’t have a dedicated department overseeing the rise of digital currencies. Perhaps a little counter-intuitively, supporters of the industry actually want to be regulated. Though BaFin’s hands-off approach may give them freer rein, they also yearn for credibility – as has happened in Japan since regulators stepped in. Otherwise they warn that Germany risks missing the boat, just like it did with the rise of Silicon Valley technology companies.
“Germany missed the Web 2.0 revolution, which is why the global players haven’t come out of Germany. The Blockchain revolution offers the possibility of a second chance,” reads a position paper issued last week by a Berlin-based association for blockchain and digital currency providers, which was created only last June. The group last week presented a 16-chapter list of suggestions for how the newest sector could be regulated. Among other things, it called on polticians to sanction “digital securities” and rules to govern taxation in the digital sphere.
Unlike other countries, the association complains that BaFin to date has only one dedicated specialist on the subject. Nina Siedler, a Berlin lawyer who works with startups in the field, said it’s time for politicians and regulators to set more specific legal guidelines for the sector, “even if that means more concrete oversight.” That’s a trade-off the industry is willing to accept.
Regulators here aren’t sure they’re ready to lend Bitcoin that kind of credence just yet. Germany’s central bank has advised against buying into the currency, while even consumer groups essentially treat Bitcoin like any other derivative – and a particularly volatile one at that. The top consumer organization in the country says investing in Bitcoin is “not to be recommended.” Anyone who does invest should be clear that they are speculating – and accept that they could lose their entire investment if things go wrong.
That may still prove true. Britain’s financial regulator FCA issued a similar warning to private investors last week. But if things do go wrong and investors are left holding the bag, they might blame the regulators who refused to help prevent the crisis from coming.
Handelsblatt staff in Frankfurt, Berlin, New York, Beijing and Tokyo contributed to this story. Christopher Cermak contributed and adapted this piece for Handelsblatt Global. To contact the authors: email@example.com